Stock Market Investing

Investing in the stock market is probably the best way to build long term financial security. By holding a diversified basket of stocks or ETFs you can earn passive income and watch your wealth grow. Many beginners find the stock market scary and intimidating, so they put off investing altogether. But it’s not difficult to get started. 🙂

Introduction to the Stock Market

Stock picking isn’t gambling. But it’s not for everyone. You have to be prepared to do some work. And you have to be prepared for market declines. If you enjoy doing research and learning about companies. And you have a stomach for the ups and down of the market, then investing in stocks can be a lot of fun and rewarding.

A stock represents a part ownership of a company. If a business has 100 shares of stock, and we own 10 shares, then we legally own 10% of the entire business.

How the Stock Market Works

Stocks can be valued a number of different ways. A common method is to use the price to earnings ratio. This is price of a company’s stock price, divided by the annual profit or earnings it generates. If this ratio is below 15 times then the stock may be considered undervalued, and represent a good buying opportunity. Of course this is just one way to analyze a stock. Other methods include the discounted cash flow, or Graham formula. 

Where to hold stock to maximize tax efficiency

Tax-advantaged vehicles should be used whenever possible. The government incentivises everyone to save for their own future retirement.

For Canadians

  • TFSA. This tax free savings account lets you invest in stocks or other securities and any profit you make is completely tax free. This account gives you the flexibility to save for retirement as well as other big events in your life. If you’re making less than $80,000 a year, it’s generally a good idea to max out your TFSA before contributing to an RRSP.
  • RRSP. This registered retirement savings plan allows you to contribute pre-tax dollars from your income. Your investments can grow without tax penalty within the account. And you only pay taxes when you withdraw the money.
  • RESP. This registered education savings plan is a must have for any parent with young children. The government will match a part of your contributions, effectively giving you free money for your child’s future education.

For Americans

  • Roth IRA. Similar to a TFSA, this account offers tax-free growth and tax-free withdrawals in retirement.
  • Traditional IRA. Similar to an RRSP, investors can make pre-tax contributions and the investments in the account grow tax-deferred. In retirement, the individual pays income tax on withdrawals from the account. If you work for a large company, the 401(k) is the group version of this.
  • 529 Plan. Similar to the RESP, this is a tax-advantaged savings plan that is designed to encourage saving for future education costs.

 

How to buy stocks

The first step is to open a discount brokerage account. The easiest way is to walk into your local Bank branch with 2 pieces of ID (eg: your driver’s license and a credit card,) and ask to speak with a representative to help you open up an investment account. Once you are sitting in a room with the representative tell him or her that you’d like to open up a self directed brokerage account. They will know what to do 🙂 This process is the same at all major banks.

You will need to remember (or write down) 3 important pieces of information when creating your new account with the bank representative.

  1. Your user ID
  2. The log in password.
  3. Your trading password, which you will only use when you actually buy or sell a stock.

 

Placing a stock order

Once they set you up you will have access to your new account online. Alternative to traditional banks you may also go with alternative discount brokerage firms such as Questrade or Interative Brokers, for example.

Checking your online brokerage account is similar to doing online banking. Simply log in to their site on your home computer using your user ID and log in password. I suggest minimum stock investment should be no less than $1,000 to begin.

Once you have your account set up, you can begin buying stocks. Using TD’s web interface below we can buy some shares of BCE Inc, the parent company of Bell Canada. Most of these boxes are self explanatory.

 

The Action: is to “Buy” 100 Quantity of the company “BCE.”

We can either choose to buy it at whatever the “Market” price is, or set a “Limit Price” for ourselves which means if the stock price moves higher than this amount we’re not going to buy it anymore. We can also extend the expiration of this order but it’s usually not necessary.

buying_bcetest1

The next step is a summary of our stock order. Since the price of BCE is trading at $47.47 per share, and we want to buy 100 shares, our total principle value is $4,747. Enter the trading password and the order process is complete.

buying_bcetest2

Other brokerage firms should have a similar interface. Selling a company works the same way. Just choose “Sell” instead of buy. And for “Limit Price” it would be for the minimum amount you’re willing to sell at, instead of the maximum you’re willing to buy at.

There also indirect ways of buying stocks. Such as through mutual funds or Exchange-Traded Funds (ETFs.)  Funds can provide broad market diversification at a low cost. An ETF is a collection of specific investments, such as a basket of dividend stocks or technology stocks. When you buy a unit of an ETF, you are actually getting exposure to hundreds if not thousands of different companies.

 

Don’t stop learning

Investing in stocks should be something you continue to do for the rest of your life. So continue learning and growing your investment knowledge over time. Hopefully this article has provided you with everything you need to get started. The rest is up to you. 🙂

8 thoughts on “Stock Market Investing

  1. traderxp review

    Some time ago, about 2 years to be exact, as I watched the stock market tumble day after day and week after week, I decided to put into place what I deemed to be the simple laws of physics. That is, what goes up must come down, the stock market being no exception. I had some experience with the stock market over the years via my 401k and other various retirement/savings plans that utilized the stock market as a way to earn interest on your money. I have always been a curious individual, and I was always looking to learn new things and broaden my horizons so to speak. So after putting in a fair amount of research and reading about the positive stock market experiences of others, I decided that I was ready to advance beyond the standard once a year shifting of my retirement account from one stock to another just to feel like I was making some sort of progress.

    1. Liquid Independence Post author

      It’s definitely a learning progress and I’m trying to pick up on new knowledge and stock strategies all the time 🙂 Having a curious personality helps a lot.

  2. freedom

    Hi, I stumble upon your site through other site stories about the two vancouver couple who plan to retire in their mid 30’s and it mention you! I too want to retire soon just like you but I’m not a big risk taker like yourself 😛 Hey, after reading all this it could all change if I want to make it one day soon! You did an awesome job and you started at such a young age, your very smart! Keep it up cause you will make it at this rate.

    Can I get your opinion?…I currently have about $15k in my td mutual fund rsp which consists of 40% CDN bond index-E, 20% CDN index-E, 20%TD US index-E and 20% INTL index-E. I get about $40-100 dividends per every 3/months which is reinvested back into my port. Should I just leave what I have and open a tfsa to start trading stocks and get more dividend income? I’m a bit confuse about which account to open and start trading such as tfsa, rrsp, etc…which is the best?

    Thank you

    Freedom

    1. Liquid Independence Post author

      Hey Freedom. Thanks for dropping by 🙂 Yes, leave what you have in your existing RSP and open up a self directed TFSA at the brokerage account level. If this will be your first TFSA then you should have plenty of contribution room ($31,000.) It appears your asset allocation in your RSP is 40% fixed income, and 60% equity. I generally recommend a more aggressive approach for TFSAs because eligible investment gains are never taxed. So perhaps allocate 80% of our TFSA investments to common stocks and REITs, and the remaining 20% to preferred shares. If you are uncomfortable choosing individual stocks to buy at first you can purchase index funds such as the Shares S&P/TSX 60 Index ETF (symbol XIU.) These types of funds will give you exposure to a broad range of companies, kind of like the mutual funds you have now. Of course much of your asset allocation depends on other factors too like whether or not you have a company pension plan, your marital status, age, risk tolerance, etc. Feel free to contact me if you have any more questions.

  3. Vanusa

    You need to know that it is the best opportunity for grwonig your wealth as it allows you to invest in a wide selection of businesses in amounts that represent a reasonable risk to you and benefit from the company with relatively little effort on your part. It would behoove you to read as many investment books as possible to develop your own theories. There are essentially two aspects to investing, finding candidates for investment and proportioning the investments as per the probabilities and risks involved. Most people focus on the former and likewise many books focus on that with the most reliable being the value investing concepts put forth by Ben Graham and espoused by Warren Buffett and others. Essentially finding stocks that are priced below their proven value due to unfortunate but hopefully temporary circumstances.The second is often overlooked but is far more important as getting it wrong could turn good investments into bad investments, in general there are two camps, those who believe that it can be quantified and those that believe that only a relative ratio of reward to risk can be quantified and the rest is dependent on individual judgement. The argument between the two centers on defining the utility of wealth. Those that believe that a reasonable guideline can be derived quantitatively often use the log utility of wealth and the methods are often referred to as Geometric, Logarithmic or Kelly Criterion; it’s usually mathematicians, engineers and physicists that are in this camp from as far back as the 1700 s, these include Bernouli, Latane, and more recently Thorpe, Kelly, and Shannon. Those that say that only human judgement will suffice are usually economists such as Samuelson, Markowitz and Scholes. I would say that though it is only human judgement that suffices due to the utility of wealth being subjective, the log utility of wealth is a reasonable approximation and hence the geometric methods provide reasonable guidance from which to develop the human judgement needed.Most people approach this second problem by wide diversification which trades potential for growth for a reduction in non-systemic risk. As to how much diversification is sufficient, that’s the trick.Read a few books, ones I would recommend are The Intelligent Investor by Ben Graham, The Dhandro Investor by Mohnish Pabrai, and Fortune’s Formula by William Poundstone. In truth you need to read as many as you can bear and formulate your own opinion.There is one far more important aspect, that is to realize that it takes discipline, it will do you no good to spend a month learning about financing and then not using what you learn for ten years. You need to have the discipline to make it part of your daily life, you must divide your income into categories as soon as you receive your income. Traditional categories are Spend , Save , Donate and Invest . The Spend category is so that you never make a financial decision because you want the money to buy something. The Save category is that you never make a financial decision because you needed money due to some unforeseen emergency. The Donate category is so that you never make an investment decision because you felt you had to help someone or contribute to society.

  4. Scratch And Win

    Seriously its damn informative.. !keep it up !

  5. Pingback: Investing in Dollarama stocks | Freedom 35 Blog

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